Following calls to reduce the regulatory burden imposed on businesses, the European Union is poised to reform a series of laws passed under the EU Green Deal that required businesses to address climate change. With a goal of reducing reporting requirements, the Omnibus Simplification Package will look at the EU Taxonomy, Corporate Sustainability Reporting Directive, and the Corporate Sustainability Due Diligence Directive. The initial Omnibus is set to be released on February 26, but a copy was leaked and heavily circulated on LinkedIn on February 22. The leaked draft shows a rollback of the CSDDD and the removal of civil penalties.
As part of the European Green Deal, a series of directives were passed by the EU to force businesses to address climate change and report carbon emissions. The goal is to comply with the climate initiates of the Paris Agreement, an international treaty signed in 2015 to prevent climate change. The agreement included a goal of reducing greenhouse gas emissions to net zero by 2050. The EU addressed this through three key legislative actions.
In 2020, the EU adopted the EU Taxonomy for Sustainable Activities. The Taxonomy created a classification system for business and investors to know what activities are considered green or climate friendly.
Then followed the Corporate Sustainability Reporting Directive in 2023. The CSRD created requirements for businesses to report GHG emissions and other environmental, social, and governance actions. For large companies, general reporting begins in 2025 for fiscal year 2024. Small and medium sized companies, non-EU based companies, and companies in high emission sectors will see reporting requirements being drafted and released over the next year.
The final piece, the Corporate Sustainability Due Diligence Directive, was adopted in May 2024. The CSDDD, or CS3D, created additional reporting requirements, as well as legal liability, for companies in relation to their supply chain. The intent is to not only regulate the direct actions of a company, but also assure their suppliers comply with climate and human rights goals. However, the CSDDD faced significant pushback during the final stages. Only finding approval after significant changes that reduced the scope.
Following an informal meeting of Council leadership in mid-November, Ursula von der Leyen, president of the European Commission, announced her intention to revamp sustainability regulations to reduce the burden on businesses. She stated the Council and Commission will have an omnibus bill that will take “a huge approach to reduce in one step, in all the different fields, what is agreed is too much today. We will look at the triangle Taxonomy, CSRD, CSDDD.”
The Omnibus Simplification Package is scheduled to be released on February 26, assuming there are no delays. The process has been shrouded in silence, but there is speculation that the releases will be delayed until March due to a lack of consensus on the final proposal. On February 22, a partial draft of the package was circulated. While it is unclear if it is the final draft, or just one of many being debated, it provides insights as to the direction of the Commission and fueled debate as to the future of the CSDDD.
Greta Koch, the Parliamentary Assistant to Axel Voss, who was heavily involved in the development of the CSDDD, noted that “such leaks are not confirmed to be the final omnibus proposal but might still be subject to further changes by the time the proposal is adopted.” There will also be a legislative process to follow, as the Parliament must also approve the changes. However, Koch provided an example showing what the proposed changes would look like in the original CSDDD text.
Proposed Changes To The Corporate Sustainability Due Diligence Directive
The leaked draft states that the proposal amends the CSDDD on “8 main points: extending the scope of maximum harmonisation, targeting due diligence, as a general rule, to direct business partners, removing the duty to terminate the business relationship as a measure of last resort, limiting the notion of ‘stakeholder’ and further restricting the stages of the due diligence process that require stakeholder engagement, extending the intervals in which companies need to regularly monitor the adequacy and effectiveness of due diligence measures, clarifying the principles regarding pecuniary penalties and removing the ‘minimum cap’ for fines, removing aspects of the civil liability clause and the rules regarding representative actions, and deleting the review clause regarding financial services.”
Extending The Scope Of Maximum Harmonisation
Harmonisation in the EU refers to standardizing the laws throughout member countries. The laws in Germany should align with the laws in France. For the business sector, it allows companies that conduct business in multiple countries to focus on EU level regulations, without worrying about individual countries imposing different or higher requirements. The original CSDDD only required harmonisation of high level, allowing countries to add more requirements. The proposal amends Article 4 by extending the harmonisation requirement to the entire framework dealing with social and environmental issues, while leaving “labour law” to the states.
Targeting Due Diligence To Direct Business Partners
One key aspect of the CSDDD is that it holds businesses accountable for the actions of other companies along their value chain. The proposal limits that responsibility of Article 8 to direct business partners. Indirect business partners may still fall under the scope, “where a company has plausible information that suggests that adverse impacts at the level of the operations of an indirect business partner have arisen or may arise, it shall carry out an in-depth assessment.”
Additionally, in line with the protection of SMES, companies are no longer allowed to request information beyond the CSRD requirements from direct partners with fewer than 500 employees.
Removing The Duty To Terminate The Business Relationship
In the original CSDDD, Article 10 required companies to, as a last resort, terminate a business relationship if the other company was violating environmental or human rights provisions. That has now become optional. However, companies must create a prevention action plan.
“The company shall, as a last resort, be required to refrain from entering into new or extending existing relations with a business partner in connection with which, or in the chain of activities of which, the impact has arisen and shall, where the law governing their relations so entitles them, adopt and implement without undue delay an enhanced prevention action plan for the specific adverse impact, provided that there is a reasonable expectation that those efforts will succeed, and use or increase the company’s leverage through the suspension of the business relationship with respect to the activities concerned. As long as there is a reasonable expectation that the enhanced prevention action plan will succeed, the mere fact of continuing to engage with the business partner shall not trigger the company’s liability.”
Limiting The Notion Of ‘Stakeholder’
Unlike the United States, in the EU, the consideration of stakeholders is a part of the fiduciary duty of corporate executives and directors. Who is considered a stakeholder is dependent on the language of the applicable law. The proposal amends the Article 3 definition of stakeholder to mean “the company’s employees, the employees of its subsidiaries and of its business partners, and their trade unions and workers’ representatives, and individual or communities whose rights or interests are or could be
directly affected by the products, services and operations of the company, its subsidiaries and its business partners and the legitimate representatives of those individuals or communities”
This amendment removes consumers from consideration as well as outside organizations or individuals not directly impacted by the actions of the company. This will significantly reduce the ability of climate activist organizations to demand information.
Extending The Intervals In Which Companies Need To Regularly Monitor The Adequacy And Effectiveness Of Due Diligence Measures
The original CSDDD required companies to carry out annual assessments for compliance. The proposal amends Article 15 to extend it to once every five years or “whenever there are reasonable grounds to believe that the measures are no longer adequate or effective or that new risks of the occurrence of those adverse impacts may arise.”
Clarifying The Principles Regarding Pecuniary Penalties And Removing The ‘Minimum Cap’ For Fines
Article 27 of the CSDDD required countries to impose financial penalties with a maximum cap that “shall not be less than 5% of the net worldwide turnover of the company in the financial year preceding the decision to impose the fine.” That language created a very costly penalty, and forced countries to allow their maximum to be at least 5% of net turnover, but gave them the option to go even higher. The proposal removes that requirement, leaving the penalties subject to further debate.
“The Commission, in collaboration with Member States, shall issue guidance to assist
supervisory authorities in determining the level of penalties in accordance with this
Article. Member States shall not set a maximum limit of pecuniary penalties in their
national law transposing this Directive that would prevent supervisory authorities from
imposing penalties in accordance with the principles and factors set out in paragraphs 1
and 2.”
Removing Aspects Of The Civil Liability Clause And The Rules Regarding Representative Actions
One significant, but relatively unnoticed, provision of the original CSDDD allowed for private legal action to be taken against companies for violations of the directive. Those actions could be taken by NGOs and unions. The language, in essence, allowed for class action style lawsuits under limited circumstances. Under the proposal, that language of Article 29 has been removed. Additionally, the proposal no longer makes civil liability mandatory, leaving it to the countries to adopt their own national standards. As it relates to harmonisation, expect this to be highly debated as it could result in forum shopping.
Deleting The Review Clause Regarding Financial Services
The original CSDDD stated in Article 36, “the Commission shall submit a report to the European Parliament and to the Council on the necessity of laying down additional sustainability due diligence requirements tailored to regulated financial undertakings with respect to the provision of financial services and investment activities, and the options for such due diligence requirements as well as their impacts, in line with the objectives of this Directive.”
This required consideration of the CSDDD in financial regulations. That language has been removed in the proposal.
Likelihood The Changes To Corporate Sustainability Due Diligence Directive Will Be Adopted
The final language of Omnibus Simplification Package as it relates the Corporate Sustainability Due Diligence Directive is still being negotiated. Once proposed, the legislative debate that follows will be one to watch and could result in changes. However, the leaked draft aligns with the overall direction of the EU on this matter, and I expect they will be adopted.
Read the full article here
